COURT OF APPEAL FOR ONTARIO

CITATION: Bank of Montreal v. Javed, 2016 ONCA 49

DATE: 20160118

DOCKET: C60246

Cronk, Pepall and Lauwers JJ.A.

BETWEEN

Bank of Montreal for itself and on behalf of all creditors of Amer Javed, Ileshkumar Shah also known as Ileshkumarpadm Shah and Mayaben Ileshkumar Shah

Plaintiff (Respondent)

and

Amer Javed, Ileshkumar Shah also known as Ileshkumarpadm Shah and Mayaben Ileshkumar Shah

Defendants (Appellants)

Shahzad Siddiqui, for the appellants

No-one appearing for Amer Javed

Ian Klaiman, for the respondent

Heard: October 13, 2015

On appeal from the judgment of Justice Mario D. Faieta of the Superior Court of Justice, dated March 11, 2015, with reasons reported at 2015 ONSC 1229.

Lauwers J.A.:

[1] The motion judge granted summary judgment on a personal guarantee and ordered the appellants to pay the respondent $55,521.79. He also set aside the transfer of the appellant Ileshkumar Shah’s half-interest in the matrimonial home to his spouse, the appellant Mayaben Shah, on the basis that it was a fraudulent conveyance.

[2] The appellants now appeal to this court. The appeal was argued on the basis that the spouses were both appellants, although the notice of appeal was filed on behalf of Mr. Shah only. Nothing turns on whether one or both spouses are appellants.

[3] I would dismiss the appeal for the following reasons.

Factual Context

[4] In early 2011, Mr. Shah, together with the co-defendant, Amer Javed, provided a joint and several guarantee to the respondent Bank of Montreal (the “Bank”) to secure a small business loan to 7596308 Canada Inc. (the “Company”). The Company operated a donut franchise restaurant. The Bank loaned the Company the principal amount of $213,486.00 secured by a promissory note dated February 24, 2011. Mr. Shah’s guarantee was limited to the amount of $53,371.50, plus interest.

[5] In late 2011, Mr. Shah resigned as a director of the Company and ceased to have an active role in it, although he remained vice-president. The Company defaulted on the loan in May 2014. The Bank made demand for payment on Mr. Shah under his guarantee by letter dated June 3, 2014.

The Issues on Appeal

[6] The appellants advance two arguments: first, the Bank’s conduct rendered the loan transaction unconscionable; and second, the motion judge erred in finding that Mr. Shah’s transfer of his interest in the matrimonial home to Mrs. Shah was a fraudulent conveyance. I address each argument in turn.

(1) Unconscionability

(a) The test for unconscionability was not met

[7] The parties agree that the three-part test for determining unconscionability is set out in Teitelbaum v. Dyson(2000), 7 C.P.C. (5th) 356, [2000] O.J. No. 4583 (S.C.), at para. 40, aff’d (2001), 2001 CanLII 32771 (ON CA), 151 O.A.C. 399, [2001] O.J. No. 3483 (C.A.). That test requires a plaintiff to show that the defendant abused its bargaining power, preyed upon the plaintiff, or that the bargain was improvident.

[8] The motion judge found that Mr. Shah did not demonstrate that the Bank abused its bargaining power, preyed upon him, or that the loan and guarantee bargain was improvident. The appellants do not argue that the motion judge erred in his application of the test for unconscionability. Instead, their argument seeks to extend the test beyond the inception of the relationship, as the motion judge explained at para. 25: “[Mr. Shah’s] factum suggests that ‘unconscionability was not present at the outset, it crept into the relationship as soon as [he] resigned as a director of the Corporation.'” Although the appeal factum does not use the same words, the appellants effectively make the same submission to this court.

[9] In early 2013, Mr. Shah contacted the Bank’s account manager seeking access to the Company’s business account information, but was refused. Mr. Shah’s argument is that it was unconscionable for the Bank to refuse to provide the information to him, particularly as to the balance of the loan that he had personally guaranteed. He argues that the Bank’s failure to provide him with timely information about the debt deprived him of an opportunity to take steps to save the business and avoid liability under the guarantee.

[10] The account manager based the Bank’s refusal to provide information to Mr. Shah on the fact that the debtor Company had withdrawn its authorization to do so, and Mr. Shah was no longer an authorized signing officer for the Company’s business account with the Bank.

(b) Bhasin v. Hrynew does not modify the unconscionability test

[11] The appellants rely on the decision of the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494. They argue that Bhasin modified the test for unconscionability by requiring the court to import “a general organizing principle of good faith and recognizing a duty to perform contracts honestly,” in the words of Cromwell J., at para. 62. The appellants assert that the effect of Bhasin is to extend the test for unconscionability from an assessment of the equities of an agreement or transaction, to the assessment of a party’s performance of its obligations under the agreement.

[12] Bhasin does not provide any basis for the appellants’ argument that the Supreme Court extended the common law test for unconscionability. Bhasin recognized a duty of honest performance. There is no basis in the evidence for suggesting that the Bank did not conduct itself honestly throughout. Cromwell J. also observed that a duty of honest performance should not be confused with a duty of disclosure. The motion judge did not err in rejecting the appellants’ arguments on unconscionability.

(c) The Bank had a disclosure obligation to the guarantor

[13] However, in my view, the motion judge erred in failing to find that the Bank breached its obligations to Mr. Shah by refusing to respond to his inquiries. Staff of the Bank explained the refusal to disclose the information as the consequence of the debtor’s change in account authorization. However, in this case, the guarantee itself contemplated that the guarantor(s) could seek information from the Bank regarding the debt secured by the guarantee.

[14] Although the guarantee does not expressly oblige the Bank to disclose information regarding the primary debtor on request of the guarantor, it suggests that the guarantor could make reasonable request for information regarding the state of the primary debtor’s indebtedness and, hence, the state of the guarantor’s exposure under the guarantee, if it were made in the proper form. The guarantee provides:

Any request by the undersigned to the Bank for useful information respecting the content and the terms and conditions of the debts and liabilities of the Customers hereby guaranteed or the progress made in their performance, shall be made in writing by such undersigned to the Bank.

[15] I make the following comments regarding this contractual term. First, and importantly, the clause in question did not entitle Mr. Shah to obtain access to the Company’s business account information, as he requested. Rather, the clause is directed at “the content and the terms and conditions” of the Company’s debts and liabilities to the Bank, if secured by the guarantee, and the Company’s “progress” in satisfying those obligations.

[16] This language, in my view, supports the conclusion that the guarantor was entitled, on the bargain made by the parties, to information regarding the state of the Company’s indebtedness to the Bank, to the extent that it was secured by the guarantee, and, hence, to information about the state of the guarantor’s personal exposure under the guarantee. In other words, the guarantor had the right to inquire of the Bank concerning the amount for which he was liable under the guarantee. The guarantor was not entitled to know the particulars of the Company’s business account with the Bank.

[17] Second, while no written request was made to the Bank, there is uncontroverted evidence that Mr. Shah made verbal requests for information to a Bank employee. In my view, the failure to make the request in the proper form is not fatal in the circumstances of this case. See Citadel Assurance v. Johns-Manville Canada, 1983 CanLII 52 (SCC), [1983] 1 S.C.R. 513, at p. 519, where the court recognized the general proposition, but added qualifications that do not apply in this case. The Bank therefore had a contractual obligation to provide information to Mr. Shah as set out in the guarantee.

[18] In this case, however, the Bank provided nothing to Mr. Shah in response to his request, for information. It therefore breached its contractual obligation to provide information to him, in accordance with the terms of the guarantee.

(d) The guarantee is not to be discharged

[19] What is the effect of the Bank’s breach of its contractual disclosure obligation? Mr. Shah argues that the guarantee must be discharged. I disagree.

[20] A guarantee is a contract, and the ordinary principles of contract law apply to a creditor’s breach. Consequently, only the most serious misconduct on the part of the creditor will discharge a guarantee. Some examples from the cases include: a creditor acting in bad faith toward the surety; the creditor concealing material information at the inception of the guarantee; where the creditor causes or connives the default of the principal debtor; or where there is a variation in the terms of the contract between the creditor and the principal debtor of a type that would prejudice the interests of the surety: Bank of India v. Trans Continental Commodity Merchants Ltd. & Patel, [1982] 1 Lloyd's Rep. 506 (Q.B. Com. Ct.), at p. 515, aff'd [1983] 2 Lloyd's Rep. 298 (C.A.) at p. 302; Bank of Montreal v. Wilder, 1986 CanLII 3 (SCC), [1986] 2 S.C.R. 551; Pax Management Ltd. v. Canadian Imperial Bank of Commerce, 1992 CanLII 27 (SCC), [1992] 2 S.C.R. 998; Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415.

[21] In Pax Management, Iacobucci J. held, at para. 42, p. 1021:

A guarantor should not be discharged from the obligation which he or she has undertaken except by acts which have some impact on the magnitude or likelihood of the materialization of that risk. Other objectionable or wrongful conduct by the creditor towards the guarantor should be dealt with by causes of action that are otherwise appropriate such as the tort of deceit or breach of fiduciary duty.

[22] Kevin McGuiness notes in The Law of Guarantee, 3d ed. (Markham, Ont.: LexisNexis Canada Inc., 2013) at s. 12.2 (p. 1001):

Usually, the measure of a surety’s damage where the creditor breaches the terms of the principal contract can be equated with a degree of prejudice suffered as a result of the breach in much of the same way as the prejudice suffered by the principal can be so quantified. Where such quantification is practical, then in order to compensate the surety adequately for the breach – and also to deter creditors from committing such breaches – the surety should obtain a partial release from liability under the guarantee to the extent of the amounts so quantified.

[23] In this case, as in Pax Management, the breach by the Bank of its contractual disclosure obligation to Mr. Shah was not sufficiently serious to give rise to a right of rescission in his favour. The breach then comes down to a question of damages based on proven prejudice to the guarantor.

[24] The reasonableness of this approach is reinforced by the law’s expectation, in general terms, that the guarantor, not the creditor, is responsible for monitoring the debtor’s behaviour. As McGuiness observes, at p. 948: “there is no general duty of active diligence imposed by law upon the creditor; as a person who has given the guarantee, it is the surety’s business, rather than the creditor’s to see that the principal performs the guaranteed obligation.” Further, at p. 363, he states: “[t]he assumption that has guided the courts is that in most cases, sureties have a superior ability to that of the creditor to monitor the performance of the principal.”

[25] There is no evidence that Mr. Shah sought any information from the Company regarding the state of its indebtedness to the Bank and was refused. In his affidavit on the motion, Mr. Shah claims only that if he had been aware of the amount of the loan, he could have somehow saved the business or convinced his business partner to sell assets in order to repay the loan. These claims were entirely abstract and speculative. Mr. Shah adduced no evidence to substantiate them.

[26] The appellants, therefore, did not discharge their positive obligation to prove damages for the Bank’s breach, and consequently are not entitled to any set-off against or reduction in the amount owed on the guarantee.

(2) Fraudulent Conveyance

[27] The second issue raised by the appellants concerns Mr. Shah’s transfer of his half-interest in the matrimonial home to Mrs. Shah two days after being told by the Bank’s account manager that a demand would be made on the guarantee. Mr. Shah purported to explain this action in his affidavit:

My legitimate reason is this: I booked a property on December 2013, well in advance of the Plaintiff bank’s demand letter and, indeed, without any knowledge of the financial problems at the Corporation. I had to ensure that I qualified for a mortgage on my own for that property.

[28] The motion judge noted, at para. 34, that Mr. Shah’s explanation for the conveyance of the property “does not make sense.” I see no error in the motion judge’s determination that there is no genuine issue requiring a trial regarding whether the transfer of the property was a fraudulent conveyance. The motion judge exercised his discretion, at para. 36, to refuse Mr. Shah’s request to “be given the opportunity to give viva voce evidence with respect to the property transfer and access to the banking information.” That exercise of discretion is entitled to deference.

Disposition

[29] I would dismiss the appeal, with costs to the Bank in the amount of $5,000, all-inclusive.

Released: January 18, 2016 “EAC”

“P. Lauwers J.A.”

“I agree E.A. Cronk J.A.”

“I agree S.E. Pepall J.A.”